Tuesday, March 17, 2009

NYT: In China's Stimulus Spending, Seeds of Surge

As we mentioned as recently as yesterday [Mar 16: WSJ - Some Steelmakers Jump the Gun in Response to Stimulus] I'm in a strange position of talking down the "thesis" of China strength when in fact I was one of the voices saying last summer that "eventually" China would be one of the leaders to bring the glove out of this mess. I just don't think it's happening yet. With that said I try to read opposing opinions/news flow and incorporate it into my theories. And once in a while I'll just be flat out wrong. I do think what the Chinese are doing in terms of stimulus will be far more effective at creating "work", but in a country which already has an overabundance of factories and real estate I doubt much of this will be productive work (outside of stopping social unrest).

This story also touches on China's long term visions and strategic planning which lasts over decades [Mar 9: Reuters - China Government Oil Reserve Full], as opposed to ours - which lasts long enough to get politicians re-elected. I am not implying they are perfect but it sure would be more comforting to stop the year after year lurch from emergency to emergency (fire fighting) and engage in some serious visionary plans. Unfortunately in a 2 party system based on lobbyist money - that vision is at odds with reality.

Via the New York Times
  • The global economic downturn, and efforts to reverse it, will probably make China an even stronger economic competitor than it was before the crisis. China, the world’s third-largest economy behind the United States and Japan, had already become more assertive; now it is exploiting its unusual position as a country with piles of cash and a strong banking system, at a time when many countries have neither, to acquire natural resources and make new friends.
  • The country is using its nearly $600 billion economic stimulus package to make its companies better able to compete in markets at home and abroad, to retrain migrant workers on an immense scale and to rapidly expand subsidies for research and development. Construction has already begun on new highways and rail lines that are likely to permanently reduce transportation costs.
  • “The recent tweaks to the stimulus package indicate a sharper focus on the long-term competitiveness of Chinese industry,” said Eswar S. Prasad, a former China division chief at the International Monetary Fund. “Higher expenditures on education and research and development, along with amounts already committed to infrastructure investment, will boost the economy’s productivity.” (this is a good point - we can point to these line items as bona fide investments rather than the Bush rebate checks or much of what has been pork barreled into the Obama stimulus)
  • The recession in most of the large economies in the world is inflicting real pain here — causing a record plunge in Chinese exports, putting 20 million migrant workers out of their jobs and raising the potential for increased and sustained social unrest.
  • To that end, The commerce ministry is leading a delegation of corporate executives to Europe this week for the ministry’s first mergers and acquisitions trip; the executives are Chinese companies are shopping for foreign businesses to acquire.looking at companies in the automotive, textiles, food, energy, machinery, electronics and environmental protection sectors.
  • Blue-collar wages, which had doubled in four years in some coastal cities, have fallen for many workers this winter, reviving China’s advantage in labor costs. (this was a worry of ours - as eventually capital will flow to where labor can be best exploited... err, I'm sorry - it will flow to where wages are lowest all things being equal i.e. central China and then to places like Vietnam or Indonesia) Unemployment has pushed down the piece rates that factories pay for each garment sewn or toy assembled. Overtime has practically disappeared. [Feb 28, 2008: China Raising Minimum Wage] [Feb 21, 2008: Rising Factory Costs Erode China's Edge]
  • Lao Shu-jen, a migrant worker from Jiangxi province who works at a blue jeans factory here, said that he earned $350 a month late last year but would be lucky to earn $220 a month this spring.
  • College graduates and highly qualified middle managers, in acutely short supply a year ago, are now widely available because of layoffs. They are likely to stay that way as universities expand — although white-collar unemployment could pose a threat of social unrest: limited job opportunities for students contributed to the Tiananmen Square protests 20 years ago.
  • Provincial governments have embarked on large-scale vocational training programs of the sort that the United States has discussed but not actually tried. (another thing our country needs to do in a large scale way) Guangdong province alone, here in southeastern China, is quadrupling its vocational training program this year to teach four million workers engaged in three-month or six-month programs.
  • The main comparable program in the United States, under the Workforce Investment Act, has been training fewer than 250,000 a year, although President Obama’s stimulus program provides funding that could more than double the number of American workers in training programs. (still only a fraction of what is needed - can't afford it I guess. Got's to pay some more AIG bills)
  • Multinationals are cutting back less in China than elsewhere — and some are even expanding. Intel is shutting down semiconductor production lines sooner than previously planned at older, smaller operations in Malaysia and the Philippines as it opens a large, new factory in Chengdu in western China. (Western China is much cheaper in terms of labor than coastal areas) IMI Plc., the big British manufacturer that manufactures items as diverse as power plant valves and brewery equipment, has just announced an accelerated shift of operations to China, India and the Czech Republic, after cutting its global work force by 10 percent since December.
  • Yet China’s economy still has weaknesses. Little is being done to shift the economy away from a heavy reliance on capital spending and toward greater consumption. The social safety net of pensions, health care and education barely exists, so Chinese families save heavily. (this is the biggest Achilles heel for a country whose trade partners are suffering so severely) And strict government policies on labor and the environment, imposed a year ago when China felt more confident of its economic strength, are prompting low-tech industries like toy manufacturing to move to other, less stringent countries.
Again the two "one size fits all" ways to play a surge in China (if you don't want to focus on commodity focused stocks or individual equities are the following ETFs

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